Oil Trading Alert originally sent to subscribers on June 27, 2016, 8:38 AM.
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
On Friday, crude oil declined sharply after news from Britain showed that the U.K. voted to leave the European Union in a historic referendum. As a result, light crude lost over 5% and dropped to the support zone, which stopped oil bears in mid-Jun. Will it withstand the selling pressure in the coming days?
Let’s examine charts and find out what can w infer from them about future moves (charts courtesy of http://stockcharts.com).
Looking at the weekly chart, we see that crude oil invalidated earlier breakout above the 61.8% Fibonacci retracement, which is a negative signal that suggests further deterioration – especially when we factor in sell signals generated by the indicators.
Will the very short-term picture confirm this pro bearish scenario? Let’s examine the daily chart and find out.
Quoting our Friday’s alert:
(…) The commodity bounced off the short-term blue support line once again and came back to the barrier of $50 – similarly to what we saw in previous days. However, (…) crude oil futures declined sharply, hitting an intraday low of $46.75. Taking this significant drop into account, we think that crude oil will follow this move and we’ll see declines after the market’s open (…). Nevertheless, even if we see such drop, we should keep in mind that around $47 is green support zone, which stopped oil bears earlier this month.
From today’s point of view, we see that the situation developed in line with the above scenario and crude oil declined sharply on Friday. With this downward move, the commodity dropped to the green support zone (created by the Apr and early May highs, the 50-day moving average and reinforced by the mid-Jun lows), which triggered a small rebound in the following hours. This suggests that we may see further improvement from here in the coming day – similarly to what we saw earlier this month.
Nevertheless, when we take a closer look at the size of volume that accompanied Friday’s decline we clearly see that it was significant, which suggests that oil bears are getting stronger and may want to push the commodity lower later this week. This scenario is also reinforced by the current position of daily indictors (the RSI and CCI reversed and declined sharply, while the Stochastic Oscillator generated a sell signal, giving oil bears one more factor to act). Taking the above into account, we think that another attempt to move lower and a re-test of the green support zone is more likely than increases at the moment.
Therefore, if we see such price action, and crude oil declines once again, we’ll consider opening short positions. Nevertheless, in our opinion, an acceleration of declines will be more likely and reliable if light crude closes one of the following days under the green zone.
Finishing today’s alert we would also like to draw your attention to one more chart.
On the above chart, we see that the oil-to-oil stocks ratio slipped to both red declining lines, which serve as the nearest support at the moment. As you see, they were strong enough to stop oil bears earlier this month, which suggests that as long as there won’t be a breakdown below them, another bigger move to the downside is not likely to be seen. Nevertheless, looking at sell signals generated by the indicators, we think that the breakdown is just around the corner. Therefore, if we see such price action, we’ll receive one more factor, which will increase the probability of a bigger decline in crude oil.
Summing up, crude oil declined sharply to the green support zone, which stopped oil bears earlier this month. As a result, light crude rebounded – similarly to what we saw in mid-Jun. Despite this increase, the medium-term picture, sell signals generated by the weekly and daily indicators and the size of volume that accompanied Friday’s decline suggest that another attempt to move lower and a re-test of the strength of the green support zone is more likely than not. Therefore, if the commodity extends declines and closes on of the following days under the green zone, we’ll likely open short positions.
Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective. We will keep you – our subscribers – informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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